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Mind your Business - 8 September 2003
Markets
The News
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Being fortunate enough to travel along the West Coast of the United States and Canada during the summer, one could not help but notice the adverts for 'farmers markets' that regularly occurred in towns along the way. Further research into this idea suggests that the concept is growing rapidly in the UK.
A farmers market is an opportunity for farmers to sell their produce directly to the public. A key feature is that those who try to sell their goods at such markets should be members of the local community where the market is being held - this is essentially therefore a market for local farmers and local people. The popularity of these markets is exemplified by figures quoted by the National Association of Farmers Markets (NAFM) following research by the National Farmers Union (NFU) (see http://www.farmersmarkets.net/). These figures suggest that the revenue generated by farmers markets in the UK amount to £166 million per year a growth of 250% in two years. They point to the number of farmers markets rising from 200 two years ago to 450 this year! Selling direct to the local community is an advantage to farmers who have complained of falling incomes as a result of a number of problems that have hit the industry in the last few years; BSE, reform of the Common Agricultural Policy (CAP) foot and mouth and so on has led to major structural changes in the industry. Farmers markets enable framers to ease their cash flow and are popular amongst customers who are more interested in buying fresh produce - particularly since the raft of food scares that have populated the news in recent years - in addition to an increased concern for a more healthy diet.
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Theories
An understanding of markets is at the heart of any study of economics and business studies. A market is any place or process that brings together buyers and sellers with a view to agreeing a price. The example above shows markets in, arguably, their most primitive light. In many respects, this is how primitive economies developed, those who had surplus items to sell offering them to those who may not have had the skills or resources to produce them themselves. The exchange allows both buyers and sellers to satisfy their needs - the seller receiving money (or some other item in a barter system) which can then be used to purchase the items they need. The process of specialisation and exchange has become extremely sophisticated in modern economies. The developments in technology mean that it is relatively easy for buyers and sellers from all over the world to be in contact with each other. This author managed, for example, to buy a CD not available in the UK from a seller in Kazakhstan via the Internet!
For farmers, there are additional issues. As your understanding of markets develops, you will study how markets have been manipulated by governments and organisations like the European Union (EU) to meet certain needs. The Common Agricultural Policy (CAP) is one such example. The origins of the CAP came from a desire to stabilise farmer's incomes, increase output and move towards a greater degree of self sufficiency in production of agricultural products. In so doing the normal workings of the market were influenced and distorted the price signals that are so important in determining decision making by both consumers and producers. Many farmers expanded output - often through raising loans to finance the increased output - as a result total output increased and as a result of other forms of manipulation, prices rose as well. The net effect has been massive surpluses. The response by the EU has been to try to reform the CAP - in essence they have had to cut output. This has led to falling incomes for farmers and many have gone out of business or had to find ways of diversifying their business. The problems farmers face has been well documented. Farmers markets illustrate one way in which farmers might react to changing market conditions. In many ways it might reflect that the free market is still a dynamic means of influencing behaviour and allocating resources efficiently to meet consumer needs!
Questions
- What is meant by the term 'free market'? (4 marks)
- Explain the difference between the following types of market:
- commodity market
- labour market
- foreign exchange market
- goods market
(8 Marks)
- Using the example of a small community of farmers with different skills, explain how wealth is created through specialisation and exchange. (6 marks)
- In what way do changing prices act as signals to consumers and producers to influence their behaviour (hint - think about how you make judgements about purchases and how businesses might make decisions on what to produce!) (8 Marks)
- Assess the effectiveness of markets in allocating scarce resources referring to any examples that you might be aware of that can support your answer. (14 Marks)
Related web sites for research
Mark Scheme
- A free market is one where the process of production and exchange (supply and demand) is carried out in an environment where there is no interference from government or other agencies. Proponents of the free market believe that the incentives to producers via the profit motive and the desire by consumers to maximise their utility (satisfaction) given their scarce resources are powerful motives to ensure that resources are allocated efficiently to satisfy wants and needs. In reality, few countries have totally free markets. This means that governments will inevitably step in to provide some goods and services - public goods and merit goods. The debate as to whether the free market is the best way of allocating scarce resources is a constant theme in economics and one that is central to many of the current debates that rage - for example the issue over health and education provision, the environment, congestion, pollution and so on. A sound answer will consist of a clear definition - try to encourage students not to copy and paste an answer but to put it into their own words to ensure they understand it and some examples to develop the point and show they can apply the concept to the real world. 2 marks for the definition and 2 for appropriate examples.
- Two marks for a clear definition of each type of market. The aim of this question is to ensure that students understand that markets can be highly organised but at the same time can cover areas such as labour affecting wage rates. A commodity market is one where goods such as wheat, sugar, tea, coffee, rubber and so on are traded - normally based in key financial centres around the world bringing together buyers and sellers of such items from around the world - for example the London Metal Exchange. Labour market - the market bringing together those seeking to employ labour with those currently looking for employment. The demand for labour is a derived demand - it depends on the demand for the goods and services being produced by the business/organisation concerned. The supply of labour is influenced in part by the education system and the number of people willing and able to work at current wage rates. The foreign exchange market - the market for buying and selling foreign currencies. Traders need different currencies to buy and sell goods and services across the world; the foreign currency market brings these buyers and sellers together. The foreign exchange markets in the City for example trade billions of pounds worth of sterling every day! Goods markets refer to the everyday items that we buy and sell - food, clothing, furniture, computers, toys, books, CDs and so on. The goods market is diverse but very important as it forms a key part of most major economies.
- This question is designed to get students thinking about the nuts and bolts about economics. We assume that students have a working understanding of such key concepts and invariably they do not! Wealth creation occurs when surpluses are created that enable exchange to take place thus generating wealth that can be used to purchase new resources that in turn help to increase the amount of surpluses and thus lead to more investment etc. Students should suggest that in a small community of farmers, each one maybe specialising in a particular crop or being dairy farmers etc, that they will produce enough for themselves but any surplus can be traded. The money (or equivalent) that they receive can be used to buy the goods they need and also to buy additional resources that can improve their efficiency and production levels. This in turn means that in the next time period farmers will have greater surpluses and can acquire more of the things they want and need. Such a process should also mean that the economy in general is also going to increase its wealth - students can be directed to Adam Smith at this point for an explanation of the invisible hand! Marks should be awarded according to the quality of the development given by the student. A clear understanding of the wealth creation process plus an understanding of the importance of production and exchange with examples rooted in the case of farmers should receive maximum marks. 1 mark each can be awarded for a definition of 'specialisation' and 'exchange'. Getting into the habit of giving a clear definition of key terms should be encouraged at an early stage.
- Consumers are motivated by acquiring goods and services that give 'utility' - satisfaction. Utility can be influenced by the price paid to acquire goods and services - the price paid therefore reflects the value put on acquiring that item by the consumer. In turn, the producer will incur costs in producing an item, the price received and the cost incurred will determine the amount of profit made. The higher the price and the lower the cost the more profit made. Rising prices would tend to suggest that an item is in demand and that there are profits to be made. Therefore there is an incentive for producers to move resources to the production of that particular item. Treat the marking here as 2 x 4 for each section. The 4 marks can be awarded for a clear explanation that makes use of appropriate terminology and shows a good understanding - probably using examples - of the motives of producers and consumers in response to price changes.
- This is an attempt to get students to place some value on the points they raise. The command word 'assess' should be emphasised at an early stage! Students should be trying to identify how markets can allocate scarce resources and how effective they are at doing this. In theory, shortages and surpluses should not exist in the long run, hopefully it will not be long before students realise that such conditions do exist in reality and start to ask questions about why such conditions exist. The examples chosen could be varied - from Wimbledon tickets to butter mountains and wine lakes! This can allow them to begin to question what is needed to make a market work efficiently. The example of the farmers market can be used to suggest that this is pretty much a perfect market. If farmer A has carrots priced at £1.50 per kilo but Farmer B has similar quality carrots at £1.00 per kilo where would buyers go? The sophistication of larger markets can then be used as a comparison to highlight the fact that we do not have perfect information, goods and services are differentiated - and we don't always know how and so on. 5 marks should be awarded for a basic explanation of how, in theory, markets should allocate resources efficiently. 4 marks should be reserved for the appropriate use of examples and the remaining 6 for the quality of the assessment given. A sound conclusion might refer to the circumstances under which a market would work effectively alluded to earlier in the mark scheme for question 5.
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